Homeowners Beware: 7 Common Financial Pitfalls to Avoid

To err is human and owners are no exception.

Owners – especially those who are just beginners investment property ownership game – are vulnerable to some errors. But on the positive side, landlords who adopt quickly and learn from their mistakes end up improving the way they manage their rental properties.

But that doesn’t mean owners should be complacent and try to take it all in stride. While it’s easy to bounce back from some mistakes, there are several financial pitfalls that can drastically turn your steady stream of income into a money pit.

Like any investment, landlords should monitor their rental properties closely to ensure their financial footing is strong. In this article, we summarize common pitfalls that homeowners fall into financially, so you can avoid them.

Common Financial Pitfalls Homeowners Should Avoid

Here are seven common financial mistakes homeowners should avoid making.

  1. Not having insurance

The journey to owning an investment property is no easy feat, so it makes sense to protect this asset.

By having homeowners insurance, you will not only cover the construction and contents of your property, but also the financial condition of your investment. This helps protect your income so you can continue to pay off that mortgage even if the property becomes vacant or a tenant fails to pay rent.

“Landlord insurance offers a range of benefits and can cover you for any malicious or accidental damage caused by tenants, any legal liability for events on the property that cause death or personal injury and loss of rental income as a result of property damage or a runaway tenant,” explained Carolyn Parrella of Terri Scheer Insurance.

Note that while homeowner’s insurance protects investors against some of the risks associated with owning a rental property, some vulnerabilities are not covered by standard building and contents insurance policies. So it’s worth considering your options.

Insurers would like to say that homeowner’s insurance covers all possible risks that an investment property may face.

Unfortunately, they can’t, otherwise insurance costs would skyrocket far beyond the reach of most homeowners. Here’s an expert’s guide to what to look for before buying homeowners insurance.

2. Not setting the rent in line with the local market

It can be tempting to set a low rent when there is high competition for tenants or to set an exuberant weekly rate when there is a shortage of rental properties in your area. However, experts say landlords should always base their rent on the local market level.

“Before buying an investment property, do some research to determine an appropriate rental price,” Ms. Parella said.

If you set the rent too high, the interest of potential tenants may be limited, which can lead to financial losses if your property remains empty for an extended period.

On the one hand, setting a rent that is too low will put you under financial pressure, reduce your rental income and may even attract unsuitable tenants.

The best way to set your price is to know your local market, as this will give you a guide to the rental market in that area. Find out how much similar properties are renting for and examine your property objectively.

If you work with a property manager, they should be able to provide you with relevant information on comparable properties and advise you on an appropriate rent range for your rental property.

Also, remember that it’s not always about the aesthetics or amenities of your property.

For example, you may brag about having a recently remodeled unit that has the newest appliances, but your neighbor may have an older unit with floors, better lighting, and additional built-ins that may be more appealing to you. other potential tenants.

Take note that the location and demographics of your property can decide how competitive your home is in this case. With that, consider several factors when comparing prices.

3. Not being aware of the regulations

Being aware of your state’s rental regulations and the legality of your lease is tedious and time-consuming, but it’s crucial work.

It’s also important to work with a trustworthy and reliable attorney to make sure you’re taking the proper courses.

4. Not having a good tax specialist

If you’re a first-time real estate investor, you’ll need everyone on deck when tax season rolls around. This is why it is recommended to call on a good tax specialist when filing your tax returns.

A good tax professional will know what to claim and when, what documents you will need and how you should file them. They are also helpful when dealing with more complex tax issues, such as negative gearing.

Without a good accountant, you could also miss out on considerable savings and income.

But if you’re more of a self-directed investor, you should know the tax deductions you can claim on your investment property.

5. Not staying on top of maintenance

NopeDon’t do regular maintenance on your rental property is a financial pitfall that most landlords overlook. Property maintenance is usually cumulative, in that it can snowball if not taken care of effectively and efficiently.

Additionally, rental properties are legally required to be safe and habitable for tenants, which means landlords must respond quickly to maintenance and repairs.

Failure to do so would not only be a breach of the rental agreement, but you could also be legally liable for damages suffered by the renter.

Are you worried that maintenance expenses will hurt your pockets? Here is seven ways to reduce your property maintenance costs.

6. Not keeping an eye on rent arrears

Another financial mistake landlords make is failing to deal with rent arrears. If a tenant is falling behind on their rent, it can be a very tedious (not to mention expensive) problem to solve and could waste a lot of your time.

“A late payment can be a mistake, so it helps both landlord and tenant keep an eye on arrears to resolve issues sooner and mitigate any financial loss for either party” , Mr. Parrella said.

If the tenant does not pay by a due date, landlords can issue a notice. Then you need to check your accounts regularly until the rent payment arrives. If after a certain number of days it remains unpaid, owners can issue a notice of default.

Experts recommend writing down the dates your tenant’s lease payments are due and checking your bank account on those days.

In the event that your tenant does not pay (or refuses) to pay when due, monitor your bank account daily. If they are in arrears, a notice of default must be sent for non-payment of rent.

Remember that the number of days in arrears of rent before a notice of termination can be sent, and the time between giving the notice and applying for a vacation vary across Australia, so it is important to familiarize yourself with local rental laws.

7. Investing too much or too little

We are not talking about the purchase price of the rental property, but rather the cost of renovations and marketing.

While some investors may be seen as overspending to make their property more attractive to tenants, this is a constant risk that homeowners face when renovating.

For example, consider whether potential tenants in your local rental market are likely to want all the bells and whistles, such as air conditioning, floors, and dishwashers, or whether they prefer a more basic living space than a good price.

On the other hand, if you’re renovating and going for the cheapest of all, it may be a bad plan in the long run. You may not be attracting the right tenants and your property may not be the first choice for those willing to spend more for good quality.

Another area to consider is marketing. While a high-end market will absolutely demand this caliber of advertising, other markets may be content with standard images.

Be sure to check out our article on easy and economical renovations that will help you increase your rental yields.

Disclaimer: This is a general guide only and is not intended to replace financial advice.

If you want to find out more about the latest real estate market insights from industry experts and other background information that will help you along your investment property journey, check out our incredible podcasts. Also be sure to check out our News section for the latest real estate market reports, information, news and helpful tips and strategies for investors.

RELATED TERMS

Investment property

Investment property refers to land, condominium unit or building purchased to earn a profit through rentals or capital appreciation.

Owner’s insurance

Homeowners insurance is a policy for homeowners that covers financial loss, or the cost of replacing or repairing damage, that may occur to a residential investment property and its contents.

building manager

A property manager is a person or company engaged to manage the day-to-day operations, maintenance and administration of a residential, commercial or industrial property on behalf of its owners.

building manager

A property manager is a person or company engaged to manage the day-to-day operations, maintenance and administration of a residential, commercial or industrial property on behalf of its owners.

Homeowners Beware: 7 Common Financial Pitfalls to Avoid



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Last update: June 01, 2022

Posted: Jun 02, 2022